Zone to Win

1. Zone Management: A New Playbook for Navigating Disruption

To compete effectively, management must free itself from this bind. It needs to reconfigure its enterprise to fight independently on multiple fronts, acting in parallel but not in lockstep.

Four distinct zones. Zone management divides enterprise activity into four zones: Performance, Productivity, Incubation, and Transformation. Each zone operates with its own unique goals, metrics, and management styles, allowing companies to simultaneously maintain existing businesses while pursuing new opportunities.

Balancing act. This framework addresses two critical challenges:

• Onboarding new lines of business while maintaining existing ones (playing zone offense)
• Defending against disruptive attacks on mature core businesses (playing zone defense)

By separating these activities into distinct zones, companies can better allocate resources, set appropriate goals, and manage the inherent tensions between sustaining and disruptive innovations.

2. The Performance Zone: Delivering Results in Established Markets

The performance zone generates virtually all the revenue and more than 100 percent of the profits of the enterprise.

Performance matrix. The core of the Performance Zone is the performance matrix, organizing established lines of business into rows (products/services) and columns (sales channels). Each intersection represents a cell with specific revenue and profitability targets.

Key elements of the Performance Zone:

• Material revenue (>10% of total enterprise revenue)
• Cyclical growth (typically 3-4% in mature categories)
• Focus on execution and operational excellence
• Quarterly business reviews and weekly commitments
• Joint accountability between row and column owners

The Performance Zone requires disciplined management and a relentless focus on meeting financial targets while maintaining customer satisfaction and market share.

3. The Productivity Zone: Enabling Efficiency and Effectiveness

To win the peace at the bottom line.

Shared services. The Productivity Zone encompasses all enterprise resources without direct revenue accountability, organized as shared services. These include core corporate functions, market-facing operations, and supply chain management.

Three key value propositions:

1. Regulatory compliance
2. Improved efficiency ("doing things right")
3. Improved effectiveness ("doing the right things")

Systems vs. programs. A critical distinction in the Productivity Zone is between systems (standardized, persistent infrastructure) and programs (targeted, time-bound initiatives). Systems focus on efficiency, while programs prioritize effectiveness. Balancing these two elements is crucial for optimizing overall productivity and supporting the Performance Zone's goals.

4. The Incubation Zone: Nurturing Future Growth Opportunities

The incubation zone is home to Horizon 3 investments, the ones that are not expected to reach material size for several years, sometimes considerably longer.

Venture-like approach. The Incubation Zone operates like an internal venture capital fund, nurturing potential disruptive innovations that could become future material lines of business.

Key criteria for Incubation Zone investments:

• 10X improvement in a critical performance metric
• Potential to scale to 10% of total enterprise revenue
• Represents a net new line of business, not an adjacency

Governance model. Incubation efforts are managed as Independent Operating Units (IOUs) with dedicated resources and milestone-based funding. A venture board oversees the portfolio, making decisions on funding, continuation, and potential exits for each IOU.

5. The Transformation Zone: Scaling Disruptive Innovations

The transformation zone is the place in an established enterprise where a disruptive business model goes to be scaled to material size.

CEO's domain. The Transformation Zone is where the CEO takes direct control, leading the effort to scale a disruptive innovation to material size (typically 10% or more of total enterprise revenue).

Key challenges:

• Reallocating resources from established businesses
• Managing the "J-curve" of initial underperformance
• Aligning the entire organization behind the transformation
• Communicating the narrative to investors and stakeholders

Success in the Transformation Zone requires unwavering commitment, clear prioritization, and the ability to navigate short-term pain for long-term gain.

6. Playing Zone Offense: Adding Net New Lines of Business

When an enterprise commits to creating a net new line of business and scaling it to material size, it puts itself under enormous resource pressure, and virtually all of its relief must come from the productivity zone.

Resource reallocation. Playing zone offense involves adding a new row to the performance matrix, which requires significant resource reallocation across all zones:

• Performance Zone: Dedicating up to 10% of go-to-market capacity
• Productivity Zone: Reengineering processes to free up resources
• Incubation Zone: Forcing exits or reprioritization of other initiatives
• Transformation Zone: Focusing all efforts on scaling the new business

Executive alignment. Success requires aligning executive compensation and priorities around the transformation, with up to 50% of annual bonuses tied to its success.

7. Playing Zone Defense: Modernizing Existing Business Models

A company earns its keep by helping its customers release trapped value in their operations. But what if the value is being trapped by your own company's offers?

Three-step strategy:

1. Neutralize: Quickly co-opt key features of the disruptive innovation
2. Optimize: Reduce costs and streamline operations to maintain margins
3. Differentiate: Reinvent the business model for long-term sustainability

Balancing act. Playing zone defense requires maintaining existing customer relationships and ecosystem partnerships while rapidly evolving the business model. This often involves painful trade-offs and difficult decisions about resource allocation.

8. Implementing Zone Management: Annual Planning and Execution

When it comes to installing anything new, as golf instructors tell their pupils everywhere, it is all in the setup.

Annual planning process. Implementing zone management requires a structured approach during the annual planning process:

1. Zone your organizations: Assign each org to a single zone
2. Lock in the performance matrix: Formalize row and column ownership
3. Activate the productivity zone: Zero-based budgeting for cost centers
4. Fence off the incubation zone: Set fund size and establish governance
5. Determine transformation zone status: Inactive, proactive, or reactive

Execution focus. Throughout the year, maintain discipline in executing zone-specific playbooks while ensuring coordination across zones. Regular reviews and adjustments are crucial for success.

9. Case Study: Salesforce's Successful Zone Offense Strategy

Marc drives transformations. He is simply world-class at doing so.

Rapid transformation. Salesforce successfully implemented zone management principles to drive growth and navigate disruption:

Key changes:

• Performance Zone: Strengthened matrix structure with empowered GMs
• Productivity Zone: Balanced systems and programs for scalable growth
• Incubation Zone: Rationalized portfolio and clarified exit paths
• Transformation Zone: Scaled Marketing Cloud to material size

Cultural enablers. Salesforce's success was underpinned by:

1. V2MOM management system for alignment and prioritization
2. 1-1-1 integrated philanthropy model fostering a generous culture
3. Collaborative yet competitive culture driven by strong leadership

10. Case Study: Microsoft's Zone Defense in a Changing Landscape

As challenging as it is to play zone offense, it is even more challenging to play zone defense.

New leadership approach. Under CEO Satya Nadella and EVP Qi Lu, Microsoft adopted a more humble and collaborative leadership style to navigate disruption.

Key challenges:

• Performance Zone: Adapting to cloud-based and mobile-first world
• Productivity Zone: Streamlining operations and embracing open source
• Incubation Zone: Fostering innovation in AI, mixed reality, and quantum computing
• Transformation Zone: Transitioning core businesses to cloud-based models

Microsoft's ongoing transformation demonstrates the complexity of playing zone defense while simultaneously repositioning for future growth opportunities.

Last updated: August 11, 2024